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CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types

An investor holds a bond with a sinking fund provision that lets the issuer repurchase bonds in the open market or call them at par, whichever is cheaper. When market yields have fallen well below the coupon rate, the issuer will most likely:

The issuer will most likely call the bonds at par through the sinking fund. With yields below the coupon rate, the bonds trade above par, so buying them in the market would cost more than the par call price. Market repurchase is cheaper only when prices fall below par.

  1. Abuy the bonds in the market at a discount
  2. Bcall the bonds at par through the sinking fundCorrect
  3. Cdelay retirement until maturity to save costs

Explanation

When yields fall below the coupon, the bond trades above par. Buying in the market would cost more than par, so the issuer calls bonds at par. Market purchases are cheaper only when bonds trade below par, as when yields rise.

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